Cold Wallet (Hardware)
Hardware wallets securely keep a crypto user’s private keys in offline or “cold” storage, meaning they are not connected to the internet, except when a user must briefly connect them to a computer to complete a transaction.
Hot Wallet (Software)
Software- or web-based crypto wallets are “hot”, or permanently online, which gives hackers more potential attack vectors through which to steal your funds.
What's in Your Wallet?
Whether you use a hardware or software wallet, it’s important to understand that your crypto holdings are not stored inside of the wallet in the same way you keep your fiat currency in a regular wallet. Cryptocurrency is simply data that lives on a blockchain, and holders access their funds through what are known as private keys.
Where are my keys?
Every crypto wallet contains a pair of these keys, one public and one private. These keys are complex sequences of numbers and letters, usually around 25-36 characters in length. The public key is free to be shared at will, serving something like a bank account number.
HOWEVER: the private key is more like a PIN code and must be carefully protected, as anyone who has it obtains full access to a user’s crypto funds, hence the common mantra in crypto circles: “not your keys, not your coins.”
Hot or Cold?
Hardware wallets (cold) are favored by more security-minded crypto users, or those with a great deal of assets to protect. This preference is a testament to the high level of security a hardware wallet offers those who wish to handle custody themselves. In fact, crypto best practices in general say you should never store large amounts of cryptocurrency in an online (hot) wallet, owing to security concerns.
However, because cold wallets are harder to access, some people use multiple wallets: a cold wallet for the larger amounts (like a savings account) and a hot wallet for everyday spending (a checking account).